• Municipal bonds notched their ninth consecutive month of positive performance, thanks largely to carried income and a friendly Fed.

• Supply continues to be well absorbed given a continued investor appetite for income and relative stability in a low-rate, high-volatility world.

• Two states recently took steps to raise the hourly minimum wage to $15, a trend we are watching closely for its impact on state finances.

Market Overview

The municipal market bucked the seasonal trend by posting a positive March, thanks in part to an accommodative Fed, which served to push rates lower (and bond prices higher). That said, most of munis’ performance for the month came from income and not from price return.

Monthly supply, at $39.4 billion, was well telegraphed and readily absorbed by the market. While issuance was 12% below March 2015, it was still above both the fiveand 10-year averages. Demand, as measured by fund flows, came in at roughly $6 billion, bringing the year-to-date (YTD) figure to an impressive $15 billion. Demand has been both robust and broad based. While the bulk of new money is entering long-duration funds, intermediate and high yield are also capturing a fair share. Strong flows have been seen in municipal exchange-traded funds as well.

Looking ahead, all but four states will aim to finalize budgets for the July 1 start of fiscal year 2017. On-time budgets may be difficult to negotiate in places, as we saw in Illinois and Pennsylvania this year. We continue to monitor the underlying health of state revenues given the challenges presented by a low-rate, low-return environment.

Making Headlines

The New York State legislature approved a $147.2 billion budget March 31 for the fiscal year started April 1. The budget was up from $142 billion last year, with the biggest expenditures remaining Medicaid and public education. A proposal to cut more than $1 billion in funding to New York City was removed from the final budget, though it requires that some $200 million in city sales tax revenue be diverted back to the state. The budget also included an agreement to raise the hourly minimum wage in NYC to $15 by the end of 2018, with slower increases elsewhere in the state.